Chapter 17: Open-Market Macroeconomics Flashcards
Define ‘Balance of trade’.
The value of exports minus the value of imports. Also called next exports, NX.
Define ‘Trade deficit’.
A negative balance of trade; a greater amount of imports than exports.
Define ‘Trade surplus’.
A positive balance of trade; a greater amount of exports than imports
Define ‘Foreign direct investment (FDI)’.
Investment when a firm runs part of its operation abroad or invests in another company abroad.
Define ‘Foreign portfolio investment’.
Investment funded by foreign sources but operated domestically. I.e. stocks or bonds.
Define ‘Net capital outflow’.
The net flow of funds invested outside of a country.
Direct investment + portfolio investment.
Define ‘Balance-of-payments identity’.
An equation that shows that the value of net exports equals net capital outflow.
NX=NCO
Define ‘Exchange rate’.
The value of one currency expressed in terms of another currency.
Define ‘Exchange-rate appreciation’.
An increase in the value of a currency relative to the value of another currency.
Define ‘Exchange-rate depreciation’.
A decrease in the value of a currency relative to other currencies.
Define ‘Floating exchange rate’.
An exchange rate whose value is determined by the market.
Define ‘Fixed exchange rate’.
An exchange rate that is set by the government, instead of determined by the market.
Usually set to be in relation to another stable currency.
Define ‘Nominal exchange rate’.
The stated rate at which one country’s currency can be traded for another country’s currency.
Define ‘Real exchange rate’.
The value of goods in one country expressed in terms of the same goods in another country.
The real XR is the nom. XR corrected for the price levels in the domestic and foreign country.
Measured in terms of goods instead of currency.
How do net exports NX respond to the value of the exchange rate XR?
When the XR is high, domestic goods are expensive and foreign goods are cheap, so net exports are low. When the exchange rate is low, net exports are high.